Rating Rationale
November 08, 2019 | Mumbai
Salarpuria Real Estates Private Limited
Rated amount enhanced
 
Rating Action
Total Bank Loan Facilities Rated Rs.117.5 Crore (Enhanced from Rs.37.5 Crore)
Long Term Rating CRISIL A/Stable (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has reaffirmed its 'CRISIL A/Stable' rating on the bank facilities of Salarpuria Real Estates Private Limited (SREPL; part of the Salarpuria-Sattva group).
 
The rating continues to reflect the Salarpuria-Sattva group's healthy business risk profile, driven by its established development and leasing track record, strong lease commercial asset portfolio, and sound saleability of its residential projects. The ratings also factor in the moderate financial risk profile along with adequate financial flexibility. These strengths are partially offset by exposure to risks related to the execution of the large commercial real estate development plans and subsequent leasing, geographic concentration in revenue, and susceptibility to cyclicality inherent in the real estate sector.

Analytical Approach

For arriving at its ratings, CRISIL has combined the financial and business risk profiles of all the entities of the Salarpuria-Sattva group that have contracted external debt and have ongoing or planned projects. This is because all the entities are managed by the same promoters and have fungible cash flow. CRISIL has also combined the financial and business risk profiles of the group's joint ventures (JVs) because of the group's significant control over the operations of the JVs, and because it is likely to provide need-based financial support to the JVs for timely servicing of term debt. The entities are collectively referred to as the Salarpuria-Sattva group. CRISIL has not consolidated the other businesses such as aerospace, technology, finance and investment as these are not related to the group's core real estate business. Also, the scale of operations in these businesses is very small vis-a-vis the group's networth.

Please refer Annexure - List of entities consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description
Strengths
* Healthy business risk profile
The Salarpuria-Sattva group has an established position in the real estate market in Bengaluru. It has developed around 480 lsf of built-up area till date, of which around 54% comprises commercial development and the balance residential development. Most of the development has been in Bengaluru, which has helped create a good brand in the market. The group has started diversifying into the Hyderabad commercial market with 60% of its commercial projects under construction being in Hyderabad. It has one hotel in Kolkata which became operational in September 2014. The group will benefit from its established track record in the real estate market.

The group had a commercial lease asset portfolio of 66 lsf as on March 31, 2019 and is expected to ramp-up in the group's operational commercial portfolio. The annualised lease rental income is expected to triple by March 2022 from March 2019 levels. The construction progress is in line with expectation, with 40 lsf of incremental commercial area completed in fiscal 2020. Moreover, another 50% of under construction commercial area is likely to be completed in fiscals 2021 and 2022. The occupancy level in the operational portfolio is healthy at over 90%. Healthy occupancy demonstrates the group's established position in the commercial business segment in Bengaluru and Hyderabad. Stable cash flow from the commercial portfolio will provide financial flexibility in raising lease rental discounting (LRD) loans. Project implementation, along with tie-up and commencement of lease rental income, will remain a key monitorable.

The group has ongoing projects of around 67 lsf of saleable area in the residential segment. Launched projects had healthy sales of 34% as on March 31, 2019. Sustained saleability in residential projects will result in adequate cash flow over the medium term. Residential sales were at 11 lsf in fiscal 2019 (same as in fiscal 2018) and should remain steady over the medium term translating into advances of Rs 600-800 crore per fiscal.

* Moderate financial risk profile
Capital structure is comfortable, supported by a healthy networth of around Rs 5,000 crore and bank debt of around Rs 4,500 crore as on May 31, 2019. Bank debt has increased from Rs 3,500 crore as on March 31, 2018, and the incremental debt primarily comprises construction finance loan for the under-construction commercial asset portfolio.

While the debt is expected to increase to around Rs 8,000 crores over the medium term, the construction loans are expected to be converted into long-tenure LRD loans once the properties become operational and are leased. However, the leverage will remain steady with lease rental discounting (LRD) debt to lease rentals expected to remain around 5-5.5 times. More than 70% of the total debt is expected to be backed by lease rentals.

The group avails of overdraft funding rather than conventional term loans, which helps manage cash flow better and results in lower interest outflow. The group has sufficient cushion for accessing the limits when needed. It had unutilised bank limit of about Rs 800 crore as on August 31, 2019. The additional commercial portfolio and healthy saleability in residential projects should help keep the financial risk profile moderate over the medium term.

Weaknesses
* Exposure to implementation and demand risks in newly acquired commercial projects and saleability of the newly launched residential projects
The group has acquired many assets (commercial as well as residential) in Hyderabad and Bengaluru, out of which a few projects have been launched and a few will be launched in the next few years. Lease rental income is expected to ramp up over the medium term because of the under-construction commercial portfolio of 180 lsf (as on date) in phases. Any delay in completion and decline in demand could hit the cash flow and the group may have to raise more debt to meet obligation on construction finance loans.

The ongoing projects in the residential portfolio are expected to sustain their saleability in the near term. Lower-than-expected demand for these projects could result in lower collection and adversely impact the group's cash flow.

However, strong track record in the real estate space, along with the expected demand in the commercial space in the geography, mitigate the implementation and demand risks.

* Exposure to the inherent risks in the real estate sector
The Salarpuria-Sattva group is susceptible to the cyclicality inherent in the real estate sector, which could result in fluctuations in cash inflow because of volatility in sales. In contrast, cash outflow, such as for meeting debt obligations, is relatively fixed.
Liquidity Strong

The group is expected to have strong liquidity supported by cash and cash equivalent of Rs 360 crore and unutilised bank lines of around Rs 800 crore as on March 31, 2019. Liquidity is also supported by strong refinancing ability with a healthy loan-to-value ratio of around 50 and lease rental top-up potential of Rs 600-800 crore.

Outlook: Stable

CRISIL believes the Salarpuria-Sattva group will maintain its established market position, supported by its development track record.

Rating sensitivity factors:
Upward Factor:
* Reduction in Debt Levels resulting in LRD Debt to annualized Lease Rentals ratio of less than 4.5x and construction debt being not more than 30% of total debt.
* Faster-than-expected ramp-up of lease rentals or saleability in residential projects, strengthening the financial risk profile, especially debt protection metrics

Downward Factor:
* Weakening of debt protection metrics leading to LRD debt to annualized Lease rentals ratio of more than 6.5x or construction debt being more than 40% of total debt
* Lower-than-expected cash flow due to delay or cost overrun in construction of additional leasable space or vacancy of more than 15% in leasable space or lower-than-expected rental rates
* Lower-than-expected saleability in the residential segment.

About the Group

The Salarpuria-Sattva group was founded by the late Mr G D Salarpuria in 1986 in Kolkata. Mr Bijay Agarwal, managing director, manages the operations of the group. The group has been involved in construction and development of real estate for 33 years. Salarpuria Properties Pvt Ltd and Sattva Developers Pvt Ltd are the two flagship companies of the group. The other group entities are mainly involved in individual projects. It has ISO 9001:2008, 14001:2004, and 18001:2007 certifications. Till date, 480 lsf of area has been developed, of which, around 54% comprises commercial development (mostly in Bengaluru and Hyderabad). The group also has presence in Pune, Coimbatore, and Goa.

Key Financial Indicators (Group)
Particulars Unit 2019* 2018
Revenue Rs Crore 1197 1048
Profit After Tax (PAT) Rs Crore 481 462
PAT Margin % 27.1 29.5
Adjusted debt/adjusted networth Times 0.9 0.8
Adjusted interest coverage Times 4.8 3.3
*fiscal 2019 are provisional numbers

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments.
Annexure - Details of Instrument(s)
ISIN Name of instrument Date of allotment Coupon rate (%) Maturity date Issue size (Rs crore) Rating assigned with outlook
NA Overdraft NA NA NA 17.5 CRISIL A/Stable
NA Term Loan NA NA Jul-2019 13 CRISIL A/Stable
NA Proposed Long Term Bank Loan Facility NA NA NA 87 CRISIL A/Stable
 
Annexure - List of entities consolidated
Fully consolidated entities
Coremind Software Pvt Ltd, Darshita Hi Rise, Darshita Infrastructure Pvt Ltd, Debonair Realtors Pvt Ltd, Greenage Griha Nirman Pvt Ltd, Harkeshwar Realtors Pvt Ltd, Mascot Properties Pvt Ltd, Mindcomp Properties Pvt Ltd, Mindcomp Tech Park Pvt Ltd, Monotype Griha Nirman, Neelanchal Projects LLP, Neelanchal Realtors LLP, Poorna Build Tech Pvt Ltd, Poppy Realtors Pvt Ltd, Quadro Info Technologies Pvt Ltd, Rajlaxmi Griha Nirman Pvt Ltd, Rajmata Realtors Pvt Ltd, SS Developers, Salarpuria Developers Pvt Ltd, Salarpuria Griha Nirman Pvt Ltd, Salarpuria Housing Pvt Ltd, Salarpuria Properties Pvt Ltd, Salarpuria Real Estate Pvt Ltd, Sattva Developers Pvt Ltd, Sattva Housing Pvt Ltd, Sattva Real Estate Pvt Ltd, Softzone Tech Park Pvt Ltd, Sppl Property Management Pvt Ltd, Wateredge Builders, Worldwide Realcon Pvt Ltd, Darshita Housing Pvt Ltd, Darshitha Southern India Happy Homes Pvt Ltd, Eden Buildcon Ltd, Jaganmayi Real Estate Pvt Ltd, Moonlike Construction Pvt Ltd, Salarpuria Builders Pvt Ltd, Satern Grihanirman Pvt Ltd, Siddeshwari Grihanirman Pvt Ltd, Bhojeshwar Realtors Pvt Ltd, Chinnamasta Properties Pvt Ltd, Darshita Projects Pvt Ltd, Darshitha Build Tech, Darshitha Edifice LLP, Moonlight Niketan Pvt Ltd, Neelanchal Dwelling LLP, Neelanchal High Rise LLP, Neelanchal Lifestyle Housing LLP, Pluto Realtors Pvt Ltd, Sattva Build-Con Pvt Ltd, Sattva Infrastructure India Pvt Ltd, Sattva Realtors Pvt Ltd, Savitrimata Realtors Pvt Ltd, Vedant Grihanirman Pvt Ltd, Wellgrowth Grihanirman Pvt Ltd, Devbhumi Realtors Pvt Ltd, Haraparvati Realtors Pvt Ltd
Moderately consolidated entities
Darshita Aashiyana Pvt Ltd, Laxminarayan Vyapaar Pvt Ltd, Neelanchal Landholdings LLP, Nine Hills Education Pvt Ltd, Satkruti Education Management (P) Ltd, Sattva Property Mg Pvt Ltd, SPPL Hotels (P) Ltd, Trigger Supply Pvt Ltd
Annexure - Rating History for last 3 Years
  Current 2019 (History) 2018  2017  2016  Start of 2016
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund-based Bank Facilities  LT/ST  117.50  CRISIL A/Stable  30-10-19  CRISIL A/Stable  06-07-18  CRISIL A/Stable  13-04-17  CRISIL A/Stable  04-07-16  CRISIL A/Stable  CRISIL A/Stable 
All amounts are in Rs.Cr.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Overdraft 17.5 CRISIL A/Stable Overdraft 17.5 CRISIL A/Stable
Proposed Long Term Bank Loan Facility 87 CRISIL A/Stable Proposed Long Term Bank Loan Facility 7 CRISIL A/Stable
Term Loan 13 CRISIL A/Stable Term Loan 13 CRISIL A/Stable
Total 117.5 -- Total 37.5 --
Links to related criteria
CRISILs Approach to Financial Ratios
CRISILs Bank Loan Ratings - process, scale and default recognition
CRISILs Criteria for Consolidation

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